County blasts Sterling audit

MARK MORAN/Staff Photographer
Luzerne County officials have taken issue with a federal audit of spending on the Hotel Sterling in Wilkes-Barre.

Luzerne County officials blasted the federal audit that recommends the county return $6 million in federal funds misspent on the failed Hotel Sterling project, according to the official county response released Friday.

The county "did not properly evaluate" or monitor "a high-risk loan" of $6 million to CityVest, the nonprofit owner of the Sterling property, according to the Oct. 31 audit from the U.S. Department of Housing and Urban Development's Office of Inspector General.

"OIG ignores the fact that the transaction is not yet complete. The term is until 2022, yet OIG seeks a rush to judgment," Andrew Reilly, executive director of the county office of community development, wrote in the response to Nadab O. Bynum, director of the Office of Community Planning and Development in HUD's Philadelphia office.

The project failed to meet its objective on job creation because the City of Wilkes-Barre last year declared the 104-year-old structure unsafe and demolition of the seven-story building is planned, the HUD audit said.

In Friday's response, Reilly said the county "is seeking recovery of the asset which has substantial value both in cash, as well as development potential, including job creation."

An agreement to demolish the building has been stalled by a dispute between the county and CityVest over releasing CityVest and CityVest officials from future liability. The goal of the Sterling project from 2002 to 2010 was preserving the historic hotel, and CityVest and the county claimed the project would create at least 175 full-time jobs.

"We clearly admit that the permanent jobs were not created yet," Reilly wrote to Bynum. "There is no provision in HUD regulations, Federal, State or local policies and regulations that require repayment for a failed project. OIG is substituting a standard that does NOT exist."

CityVest received $6 million from the county Business Development Program, which was funded by HUD's Community Development Block Grant Program. CityVest disclosed in April 2011 it was unwilling to preserve the building and could not pay back the county.

"â¦ the CityVest project is not a loan but a deferred grant and there never was/is a requirement to repay $6,000,000 if the 'loan' did not meet its job goal," Reilly wrote. "We clearly expect that the negotiations currently occurring will produce permanent jobs on this site. The exact number has yet to be determined."

J.G. Petrucci Inc. submitted the lone development proposal for the 4-acre Sterling property in August. The New Jersey-based firm proposed the construction of a new five-story building with commercial and retail space after the Sterling is demolished.

The firm is a "credible developer" with a track record, as opposed to a company created for a single project, and the county could also choose another developer if the county and CityVest agree to terms, county Manager Robert Lawton said last week.

In the response to Bynum, Reilly noted the county Business Development Program also includes funds that are not related to the federal Community Development Block Grant Program.

"We are disturbed by the lack of knowledge of the CDBG Program by employees who purportedly are professional auditors from OIG," Reilly wrote.

County commissioners approved the loan to CityVest in November 2002 for a "project that lacked a plan," the HUD audit said.

"Given that the $6 million loan the County made to CityVest was by far the largest loan in its business development loan portfolio, it was reasonable to expect the County to have conducted more than a cursory level of evaluation and underwriting before making the loan," the audit said.

CityVest spent $3.3 million on demolishing buildings near the seven-story hotel building, $1.5 million on property acquisition and $1.2 million on professional and financial fees, according to the HUD audit.

The federal audit backs up findings from a county audit released in June 2011 by Controller Walter L. Griffith Jr., and it noted "a citizen complaint alleging possible misappropriation" of federal funds.

"The OIG knows that the 'citizen' was in fact, the elected County Controller acting in his official capacity," Reilly responded.

A federal grand jury initiated a probe of the Sterling project in December 2011, according to a subpoena issued to county commissioners. To date, that probe has not produced any indictments.

mbuffer@citizensvoice.com

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